6.3 crore Micro, Small, and Medium Enterprises (MSMEs) of India employs about 11 crore folks. However, they had been, regrettably, one of the worst-hit by the very first wave of the pandemic that impacted their access to markets, credit, and economic safety. This prompted the Indian Government to announce a slew of measures aimed at shoring up their economic and transactional overall health. As we grapple with an even deadlier second wave of the pandemic this year, it would be exciting to see how last year’s schemes have fared so far, so that a beneficial indicator can be constructed of what worked and what didn’t. This could possibly aid policymakers as they work the numbers for the inevitable announcements this year as well.
Taxes and compliance
Several announcements had been made to provide relief to taxpayers such as MSMEs from tax compliance norms and deadlines. The TDS prices to be deducted had been slashed by 25 per cent for non-salary payments. Tax filing dates had been extended by 30 to 90 days. There was a reduction in the price of interest on delayed payment of taxes, and an amnesty scheme (zero penalty) for service tax dues paid inside December 2020 was also announced. The last date for filing of GSTR 3B was pushed back, and there was also a little concession on the late filing charge.
Simple items like the GST structure and filing calendar do not agree with the definition of an MSME (little taxpayer) vis-a-vis massive taxpayer. A micro-enterprise (turnover up to Rs 5 crores) is anticipated to file returns when a quarter, but the frequency is month-to-month for a bigger organization. That is why if such a micro-enterprise is a vendor, supplier, or contractor for a bigger organization, then the bigger client frequently withholds the tax payment of the invoice or possibly the complete invoice till the time that enterprise declares the relevant returns. This is a thing that could be worked on.
Creating nearby demand
Because of their smaller sized scale and scope, MSMEs frequently discover it challenging to relatively compete with bigger corporations in the domestic marketplace. Additionally, the opening up of organization boundaries has also made the threat of multinational or foreign organizations pretty actual. This threat gets compounded in challenging occasions like the existing pandemic. The Aatmanirbhar Bharat package announcements for MSMEs in 2020 also integrated one which barred international bidders for government tenders of up to Rs 200 crores, such as consultancy services and turnkey projects.
While it is not possible to particularly pinpoint how a lot of MSMEs won contracts from June 2020 onwards as a outcome of this ruling, but like the modifications in GST guidelines, this initiative also required a handful of more reforms in the procurement course of action to be genuinely beneficial to MSMEs. For instance, larger firms with more practical experience are far better in a position to tackle the quick application windows and higher earnest income amounts. Also, some modifications to the practical experience criteria for MSMEs could have helped them acquire the self-confidence to bid for projects.
Technology upgrades
The Credit Linked Capital Subsidy Scheme (CLCSS) was introduced quite a few years ago to encourage investment in technologies upgrades. As per this scheme, any institutional finance (up to a maximum of Rs 1 crore) availed by little-scale units to incorporate the newest technologies in their workflow would be instantly offered a 15 per cent capital subsidy upfront. Initially, an outlay of Rs 2,900 crore was allotted for the scheme but lately the scheme was changed to a demand-driven one with no any upper limit on the all round annual limit.
This has led to a doubling of MSMEs which benefited from this scheme from 7,779 in FY20 to 15,188 in FY21. The total subsidy also doubled to Rs 1,one hundred crore from Rs 540 crore. While it is heartening to see this uptick in investment into technologies, big gaps nonetheless stay. For instance, the scheme is restricted to particular notified sectors and only applicable to current borrowers. The advantages are concentrated about a handful of states like Gujarat, Maharashtra, and Punjab with Gujarat accounting for more than 42 per cent of the advantages. It would be a great concept to spread awareness and encourage MSMEs in other states to take far better benefit of this scheme in FY22.
Faster payment cycles
Larger corporations can use their deeper pockets to meet the working capital needs even if the payments for previous work have not however been received. But for micro and little enterprises, the smaller sized order book and modest money reserves typically cripple them if payments are delayed as well a great deal. An MSME can, hence, do far better if their accounts receivables are settled more quickly. The Government acted on these more than which it had manage. All Central Public Sector Enterprises (CPSEs) were instructed to release their outstanding payments inside 45 days. The CPSEs responded admirably. As the chart beneath shows, an typical of Rs 3,000 crores was paid just about every month by CPSEs against dues outstanding for MSMEs for the very first seven months right after the announcement.
The very same MSME Ministry statement from which the chart is taken also goes on to inform that orders placed to MSMEs by CPSEs also went up in this very same period. To continue this great work, government agencies and CPSEs will have to be encouraged to hold a similarly prompt payment cycle at all occasions, not just for the duration of the pandemic.
Production-linked incentive scheme
This scheme was announced in early 2020 with an initial outlay of Rs 2 lakh crore aimed to increase manufacturing investment in India. The scheme supplied economic incentives from 4 per cent to 6 per cent of incremental sales with FY20 regarded as the base year to manufacturing units below particular important sectors. Due to the higher capital investment thresholds and production targets, more than the last year, most companies that benefited from this scheme had been massive MNCs or corporate firms. While there was an indirect push from the government to supply from nearby companies expanding the provide chain in the nation, the scheme has not had a direct influence on MSMEs. Several business bodies have requested for a new MSME targeted PLI scheme or widening of the current scheme to aid little companies reap the advantages of it.
Funding assistance
One of the vital measures taken by the government to tackle the pandemic and its impact on MSMEs contains a slew of financing assistance to nearby companies. Some of the measures taken in 2020 had been:
- A six-month moratorium on loan repayments (classified by banks as ‘standard’ at the time of announcement) by MSMEs was announced by the Reserve Bank of India for the March to August 2020 period. More than 30 per cent of MSMEs benefited from the RBI moratorium as it was availed by nearly a third of MSMEs with existing loans outstanding. But the moratorium functioned only like a short-term repair for the ailing MSME, and it did not assure full recovery. Also, measures to strengthen the demand side had been significantly less visible, creating repayment of loans plus the interest accrued for the duration of the moratorium challenging. Adding to the woes, localized lockdowns due to the second wave and non-extension of the moratorium this time has place MSMEs in a extreme money crunch. It remains to be seen if these MSMEs can emerge from it in a healthful manner.
- Additional subordinate debt facility of a total of Rs 20,000 crores was operationalised by way of the Credit Guarantee Fund Trust for MSEs (CGTMSE) and the loan disbursal limit was elevated from Rs 1 crore to Rs 2 crore. Disbursements with credit guarantees of more than Rs 30,000 crores occurred in FY21 below the CGTMSE scheme. While this is the second-highest quantity in the last nine years, it nonetheless is a 30 per cent drop from last year.
- Support was supplied for working capital demands, operational liabilities, and organization restart expenditures to the extent of Rs 3 lakh crores below the Emergency Credit Line Guarantee Scheme (ECLGS) scheme. Around 60 lakh MSMEs availed of the ECLGS scheme, with about two-thirds of the sanctioned quantity disbursed in the very first nine months of the economic year. While the scheme was in the proper path there had been quite a few difficulties pointed out by MSMEs like inequitable distribution of funds, benefitting only current borrowers and not the very first-time borrowers, tedious documentation, and hefty registration charge and stamp duty.
- A Fund of Funds of Rs 50,000 crores was set up for equity infusion into MSMEs to encourage them to augment their capacity and get themselves listed on the stock exchanges. Rs 10,000 crore would come from the government and the remaining Rs 40,000 crore was anticipated to come from VC and PE firms to fund revolutionary MSMEs and drive them towards development and eventual listing on the SME or Startup stock exchange. As of now, there is no facts on how a great deal of this was mobilized and offered out to startups and MSMEs.
Final thoughts
The measures announced last year had been nicely-intentioned. The dipsticks pointed out above showed that some of them did work reasonably nicely in particular pockets, although some other folks had a lukewarm impact on the MSME sector. In summary, there are two takeaways that really should be kept in thoughts for the second wave. First, there are quite a few basic roadblocks in the way our MSMEs work. Despite quite a few nicely-intentioned announcements, the reality remains that there are a disproportionate quantity of compliance and regulatory burdens just about every MSME faces compared to bigger companies. The government demands to fully shift its mindset to a facilitator from a regulator. Second, economic and regulatory sops, although valuable, do not close the loop for MSMEs. More structural modifications which aid recharge the demand side and enhance MSME operational efficiencies by way of technologies and skilled labour would be the lengthy-term technique to attain the aim of raising MSME contribution to 50 per cent of India’s GDP.
Vishal Devanath is the Founder of Smergers. Views expressed are the author’s personal.